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Next stands in line

The high street clothing chain has done well to defy the wider sector malaise
March 21, 2019

Next (NXT) shares have performed well since our 2017 buy call (4,314p, 11 May 2017), particularly on a total return basis. But the stock slipped back slightly in response to these in-line annual figures, a reflection of the ongoing struggle on the UK high street, with the results-day reaction suggesting that investors are losing interest in a much maligned sector.

IC TIP: Hold at 5,068p

But have investors become a little too apathetic? After all, total group sales increased 2.5 per cent last year to £4.2bn for the clothing chain, while full-price sales rose by 3.1 per cent, providing a positive beat for earnings. Broker Liberum went on to praise the company’s strong balance sheet, good cash generation and well-covered dividend as further evidence of its defensive position. 

Indeed, adjusted pre-tax profits of £723m were bang in line with company guidance issued in January, and only represented a 0.4 per cent decline on the prior year. That suggests resilience in the face of a deteriorating market backdrop. A more pronounced jump in EPS was down to the company’s continued share buyback programme. Over the past year, Next has returned £541m to shareholders, comprising £216m-worth of ordinary dividends and £325m in buybacks.

These returns provide support for the share price, but the performance of the online business would not have gone unnoticed. Over the past year, web-based sales shot up by 15 per cent, compared to a 7 per cent squeeze across stores. Along with a 12 per cent increase in finance revenue, brand sales improved by 2.6 per cent. Similarly, online profits rose by a healthy 14 per cent, while traditional retail profits fell by more than a fifth. These figures illuminate why the business model needs to evolve.

Though challenges facing the business are “complex”, Next bosses say the counter initiatives are relatively simple. The most important task is delivering desirable product ranges, followed by developing warehouses and logistics, maintaining availability of stock, investing in the website and pursuing more growth overseas.

Analysts at Liberum have pencilled in pre-tax profits of £712m for the year ending January 2020, giving EPS of 450p, rising to £726m and 470p in FY2019.

NEXT (NXT)    
ORD PRICE:5,068pMARKET VALUE:£ 6.97bn
TOUCH:5,072-5,078p12-MONTH HIGH:6,224pLOW: 3,970p
DIVIDEND YIELD:3.3%PE RATIO:12
NET ASSET VALUE:402pNET DEBT:198%
Year to 26 JanTurnover (£bn)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20154.00795428150
20164.18836451158
20174.10790441158
20183.87726417158
20193.92723435165
% change+1-0.4+4+4
Ex-div:04 Jul   
Payment:01 Aug